Wall Street Still Can't Manage Risk

What Happened?? Jamie Dimon - Well, “there was some stuff in the newspaper and then some other stuff.”

MF Global: How Not to Manage Risk: AP 9/18/11

Etc, etc. etc.

Wall Street’s approach has not done very well: Their products work, but they perform best in certain specific environments - and, at the extreme, they can backfire and blow up on you in the wrong environment.Investor Revolution/2007

I wrote a book titled Investor Revolution / copyright 2007. The book was released before the Wall Street financial collapse during 2008 and early 2009.

The basic theme of Investor Revolution was that Wall Street was better at creating innovative products than they were at managing the complexity of their products and the risk of the markets.

Wall Street firms don’t have a process nearly dynamic enough for managing the investment products and tools at their disposal. Wall Street has put very little focus on creating investment processes to deal with the dynamic nature of the markets. Investor Revolution/2007

To date, Wall Street has done a poor job of transitioning to a hyper connected world. Instead they specialize in producing standardized products without a process that is sufficiently dynamic to adjust to the ever-changing markets. Investor Revolution/2007

There is no reason to believe Wall Street firms will improve their ability to manage in their client’s investment portfolios. Investor Revolution/2007

The single most important key to successful portfolio management is having the ability to manage risk. If you can’t manage risk, you can’t manage the outcome. The first step in managing risk is to quantify risk. Investor Revolution/2007

Portfolios should be managed by using a well-thought-out and tested rules-based system. One must have a dynamic process to adjust the rules and manage the tools through changing market environments. Investor Revolution/2007

Today’s revolutionary investors are dealing with a very dynamic market environment. Dynamic markets:

Require a process that can adjust to their various changing market environments

Require many tools, in this case many different kinds of securities and investment products, to deal with the changing market environments. Investor Revolution/2007

The goal of the Portfolio Thermostat is to maintain the fluctuation in a portfolio within a narrow and predictable range. Investor Revolution/2007

The Canterbury Portfolio Thermostat identifies 12 different Market States. Of the 12 Market States, 6 are Bullish Market States, 4 States are Bearish, and 2 States tend to precede a transition to a Bearish Market State, meaning caution.

In other words, the Portfolio Thermostat determines if the current “macro” Market State is in one of the rational or irrational environments. Each macro Market State is determined by three primary inputs:

Indicators identifying the “long term” trend of the market or security.

Our proprietary volatility index and volatility indicators designed to quantify the current market environment from rational to irrational. Our tests have shown that the changes in volatility act as a leading indication of future market advancements and declines.

Our system uses a combination of supply and demand indicators to determine when the short term market or security is bullish or bearish.

Portfolio Management begins after the current Market State is determined and percentage allocations are made to three investment groups.

Securities are divided into 3 groups based on how correlate to the stock market during the various Market States ranging from rational to irrational. Group1: Alternative (Bonds, currencies, commodities, etc). Group 2: Countries, Sectors and Industries Group 3: Investment Styles and Market Indexes

The Portfolio Thermostat management process shifts allocations, among the three groups, based on the changes in the macro market environment (Market States from 1 to 12).

Securities are ranked each day, by an algorithm, and give specific buy, hold or sell signals.

Portfolios are reviewed daily and actions are taken when needed.

Our Portfolio Thermostat Matrix shifted to Market State 2 from Market State 1 on May 7th. Market State 2 = Bullish (Occurs during a short term pullback in a long term Bull Market). Canterbury Volatility Index = 66 (Low Volatility and Rational). Market State 2 typically represents a consolidation phase (correction) during a long term Bull Market. Volatility is low and the short term supply and demand indicators are negative, as a result of the pull back. One can generally expect a -4% to -7% correction from the previous market peak during Market State 2.

More About Tom Hardin

As Chief Investment Officer, Tom Hardin, Chartered Market Technician (CMT), makes all the final decisions on all investment and portfolio management decisions for Canterbury Investment Management. Tom has more than 30 years experience in the investment management industry and has broad breadth of knowledge. He is known as an innovator, educator and been revolutionary in the advancements in portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.